Why Partnership Agreement is important to Deal With Business Partnership Disputes in China

Wednesday, 04 January 2017 13:06

Business partnerships are like a marriage and disputes are inevitable, and wise partners will anticipate and prepare for them. The best way to handle disputes is to set clear expectations from the beginning and have a clear agreement on how to handle the disputes. Under Chinese partnership related laws, business partners have fiduciary duties and obligations. These fiduciary duties not only touch the business, but also “outside” opportunities that may be only tangentially related to the business. It is important to understand your rights and obligations in relation to your business associates and partners.

How a Partnership Agreement Helps Your Business

A partnership agreement allows you to structure your relationship with your partners in a way that suits your business. You and your partners can establish the shares of profits or losses each partner will take, the responsibilities of each partner, what will happen to the business if a partner leaves, and other important guidelines.

Common Provisions in a Partnership Agreement

Although some terms depend upon individual circumstances, standard language in a partnership agreement typically includes:

Decision-Making Authority Delegation: Who decides day-to-day issues? What about weightier matters? Will you put decisions to a vote? If so, does the decision need to be unanimous or majority rules? If partners have equal say, what happens when there is a tie? Some silent-active partner arrangements allow a silent partner a voice about monumental matters, while giving the active partner authority over daily operations. In others, a silent partner makes no decisions. By clearly delegating decision-making authority, you may avoid potential infighting when opposing viewpoints arise.

Capital Investments: The amount of money each partner contributes to the business should be unambiguous. If a partner is investing work equity, make sure the parties know what those duties and talents are and consider setting benchmarks to judge the progress made by the working partner.

Profit Distributions and Salaries: Hopefully sooner rather than later, your company will turn a profit. How do you intend to divide the fruits of your labor? How much money should be put back into the business? Will you each receive an income or a percentage of the profits?

Valuation: what methods will be used to determine the value of the business in the event of a sale, dissolution, death, disability or withdrawal of a partner?

Buy-out clause: What guidelines should be followed if one partner wants to retire, dies or leaves the partnership? Decide if partners who leave have to sign a non-compete agreement.

Non-compete clause: the use of such clauses is premised on the possibility that if a partner is expelled or leaves to start another business, he or she could potentially gain competitive advantage by abusing private information, trade secrets or customer/client lists, business practices, upcoming products, and copying marketing plans. The non-compete clause prevents this from happening.

Death and Divorce: You agreed to go into business with your partner, not his/her spouse or child. Yet, a spouse or an heir may claim an interest in the company during divorce or probate proceedings. A partnership agreement can prevent intrusion by an outside party who might otherwise have legal rights to company assets.

Dissolution: Make arrangements for dissolution before you or your partner decide to end your relationship. Otherwise, arguing over dissolution terms might burn through the profits you earned while in business together. An organized exit strategy might include buyout options or require distribution of property.

Resolve differences between partners

Going into business with a partner can be a daunting experience, as there are bound to be a number of complex questions running through your head. How well will you work together? What if you find out you have different ways of doing things? What happens if something goes wrong or the business relationship breaks down altogether?
It can be a stressful time, but you don’t have to go through it on your own. Here’s a brief guide on how to start dealing with business partnership disputes.

Fortunately, many partnership disputes are easily resolved, allowing you to carry on with your business with no further problems or at least with the knowledge of how to deal with similar problems in the future. However, some disputes are irreconcilable, and often – whether for the sake of the business or for the sake of your friendship – it is decided to dissolve the partnership entirely. Just make sure you talk through everything with your business partner prior to making any important decisions – and make sure you get specialist legal advice about the implications of any partnership bust up from an experienced lawyer and your accountant.

Know Your Rights and Ask For Professional Help in Case of Dispute

If you’ve come to the conclusion that the business partnership can’t be saved, you will be looking at dissolving the partnership. First of all, you need to know what your legal position actually is – and particular what rules govern your partnership. If you and your partner had a written partnership agreement on entering into the business, you will be very clear on what your rights are. But what if an official partnership agreement was never put into place? This isn’t the time to panic. In the absence of a written partnership agreement, the rules of your partnership will be governed by the 1890 Partnership Act.

You can either work through the terms together, or alternatively seek help from a mediator or intermediary who can sit down with you and go through everything from an impartial point of view- it’s worth doing it this way to avoid a lengthy and expensive court battle or settling for a court-dictated decision.

You will also need a good lawyer – make sure you contact an experienced litigation solicitor with plenty of experience of partnership disputes who will be able to give you more information regarding your position.

Avoiding Business Partnership Disputes In Advance

If you’re considering entering into a partnership but aren’t sure whether it’s right for you, always ask for professional advice prior to agreeing to anything with your potential business partner. A partnership can be created simply by the fact that two or more people are entering into a business together, but if you want to have control over the rules governing your partnership, it’s essential that you have a partnership agreement be written up and signed by all partners beforehand. Not only will this help you if the business relationship unfortunately breaks down, but it will also give you peace of mind when conducting your business.

It is an unfortunate truth that even the best of business partnerships can break down, but making sure a written agreement is in place and always getting specialist legal and accountancy advice so you know your rights, can make this stressful process much smoother and less daunting.

Your partnership agreement is like a prenuptial agreement. It governs the owners’ rights and responsibilities while running the business and how to deal with disputes among owners, especially problems that cannot be resolved easily. The provisions of your agreement should reflect factors unique to your company and partnership. For this reason, it is important to have a qualified corporate attorney negotiate and draft an agreement designed specifically for your partnership. As experience China business lawyer, we strongly recommend you to sign a partnership agreement before you enter into any partnership relationship with Chinese business partners.

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Peter Zhu, an experienced China attorney licensed to practice law for more than ten years, the author of this China Lawyer blog, welcomes any enquiry or consultation related to Chinese law.